Build­ing pen­sion funds

Fol­low­ing the re­cent spate of UAE visa law re­forms, the mind­set of re­tire­ment plan­ning must be ap­plied to the built en­vi­ron­ment at the fed­eral level

MEP Middle East - - COMMENT - Matthew An­thony is se­nior con­sul­tant in the Mid­dle East for Aecom.

The UAE Cabi­net has re­cently an­nounced spe­cial res­i­dency visa priv­i­leges for ex­pa­tri­ate re­tirees who wish to re­main in the coun­try af­ter work­ing age. The an­nounce­ment of th­ese visas, to be granted to peo­ple that meet cer­tain fi­nan­cial con­di­tions, has re­ceived a largely pos­i­tive re­sponse – and has sparked dis­cus­sion about just how much money one needs to be able to re­tire and live com­fort­ably in the UAE.

Rather than get wrapped up in that dis­cus­sion, I would in­stead like to high­light how the ex­am­ple of for­ward-think­ing fi­nan­cial plan­ning can be trans­ferred al­most seam­lessly into the world of prop­erty man­age­ment through the oper­a­tion of the hum­ble sink­ing fund.

WHAT IS A SINK­ING FUND?

There are many vari­ables to con­sider in an­swer­ing the ques­tion of how much money you might need when you re­tire. Where you plan to re­tire, your ex­pected age at re­tire­ment, and what qual­ity of life you ex­pect to main­tain, will all need to be taken into con­sid­er­a­tion.

Sim­i­larly, in the prop­erty man­age­ment in­dus­try, the cost of re­place­ment, and when as­sets are likely to reach the end of their life cy­cle, are im­por­tant con­sid­er­a­tions. And the date by which re­place­ment will be­come nec­es­sary will be rel­a­tively fixed, based on man­u­fac­turer’s guide­lines, recog­nised per­for­mance cri­te­ria, lo­cal op­er­at­ing con­di­tions, and the level of main­te­nance that has been ap­plied dur­ing the course of the as­set’s oper­a­tion.

Sink­ing funds, there­fore, at­tempt to an­swer the ques­tion of how much cap­i­tal is re­quired to al­low an as­set to ‘re­tire’ and be re­placed. In this re­spect, sink­ing funds can be thought of as pen­sion funds for build­ings, al­though el­e­ments of prop­er­ties tend to re­tire at dif­fer­ent points dur­ing the prop­erty’s life cy­cle, rather than the en­tire prop­erty re­tir­ing at once.

The con­cept of en­sur­ing that funds are in place to al­low for th­ese as­set re­tire­ments is sim­i­lar to a pen­sion plan that pro­vides enough funds to al­low for a per­son’s re­tire­ment. The cru­cial dif­fer­ence is that if an in­di­vid­ual does not achieve the level of sav­ings re­quired for re­tire­ment, they may need to work a lit­tle longer, whereas built as­sets may not nec­es­sar­ily have this flex­i­bil­ity.

AVOID AT YOUR OWN RISK

The risk of not hav­ing suf­fi­cient funds in place at the end of a built as­set’s life ex­pectancy is ef­fec­tively as­set fail­ure, which can po­ten­tially have an im­pact on a prop­erty’s func­tion, busi­ness op­er­a­tions, rev­enue, and rep­u­ta­tion.

The oper­a­tion of as­sets be­yond their ex­pected life cy­cle – suc­cess­fully or not – is widely seen in the Mid­dle East, and in­deed around the world. How­ever, the rea­sons for do­ing so dif­fer from one lo­ca­tion to an­other. In fact, it is more likely to be seen in emerg­ing and de­vel­op­ing mar­kets due to a lack of plan­ning, or their rel­a­tive in­ex­pe­ri­ence in un­der­stand­ing the nec­es­sary bal­ance be­tween ob­tain­ing max­i­mum value from an as­set and mit­i­gat­ing the risk as­so­ci­ated with its fail­ure.

Sink­ing funds mit­i­gate this risk by pro­vid­ing not only a fore­cast of the as­set’s re­place­ment date – in con­junc­tion with life cy­cle cost analy­ses – but also of the as­so­ci­ated re­place­ment costs, de­ter­min­ing how much cap­i­tal needs to be put aside each year to en­sure that th­ese funds are avail­able when needed.

SINK­ING FUNDS IN THE UAE

It should come as no sur­prise that the oper­a­tion of a sink­ing fund when man­ag­ing prop­erty is con­sid­ered best prac­tice and is crit­i­cal to ef­fec­tive prop­erty man­age­ment. The UAE al­ready recog­nises this.

Dubai’s Real Es­tate Reg­u­la­tory Au­thor­ity re­quires own­ers’ as­so­ci­a­tions – and, there­fore, their ap­pointed agents – to show sink­ing fund con­tri­bu­tions in ser­vice charge bud­gets. Th­ese con­tri­bu­tions must be based on a study of the as­sets that the sink­ing fund is in­tended to cover.

The mind­set of re­tire­ment plan­ning now needs to be ap­plied to the built en­vi­ron­ment in the UAE at the fed­eral level.

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